Jason welcomes Isaac to the show to discuss how credit scores are determined and used, and some simple advice on how to repair one’s credit. Plus, Randy returns to update us on the mortgage market.
Announcer: Welcome to Creating Wealth with Jason Hartman, President of Platinum Properties Investor Network in Costa Mesa, California. During this program, Jason is going to tell you some really exciting things that you probably haven’t thought of before and a new slant on investing, fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible.
Jason is a genuine self-made multimillionaire, who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it. And now, here’s your host, Jason Hartman, with the complete solution for real estate investors.
Jason Hartman: Welcome to another edition of Creating Wealth. This is your host, Jason Hartman. A couple of things today: No. 1, we have a new podcast coming up. For those of us with short attention spans, you’ll love this because it is called The Speed of Money and is a podcast you can search on iTunes or go to www.thespeedofmoney.com and we will have this on the main www.jasonhartman.com website as well. And you can subscribe to the feed of this podcast. It is a very short set of two-minute podcasts that talk about our concepts real quickly and real succinctly.
Of course, we don’t have guests or time for a lot of background or additional information, but please make sure you also subscribe to The Speed of Money. So if you’re on iTunes, you can go to the iTunes store, type in Jason Hartman or type in The Speed of Money and it’ll come up. Also, our video podcast is coming out with more programming, so be sure to listen to that one as well.
If you are a broker or agent or mortgage person, be sure you check out our affiliate program where we pay nice referral fees. Go to www.jasonhartman.com, click on Contact Us, and then Agents Welcome, and we have some great new offerings there as well, as we’re developing that program more.
Today, I’d like to start by talking about a problem that so many investors face and that is that they are winning the game when they feel like they’re losing because they just don’t understand what is really going on in the dynamics of their investment. Mostly the reason is No. 1, they don’t know how to really calculate return on investment, and No. 2, very few investors understand return on inflation and inflation-oriented debt destruction, which is just such a beautiful thing that we’ve talked about on prior episodes.
So be sure you understand these concepts because we are talking to a lot of people nowadays in this current, tumultuous economic time that are really winning the game while investing in these income properties, and yet, they feel like they’re losing. Let’s make sure we don’t shoot ourselves in the foot, that we don’t cause problems for ourselves that aren’t warranted, make sure we stay the course, and let cooler heads prevail while investing.
So again, go back, listen to prior shows. We’ve talked about this issue. We’re going to talk about it more in the future and we are also going to talk about a subject on an upcoming show that is very important, which is the subject of loan modification. Many investors are benefiting by negotiating with lenders and doing loan modifications to get better loan structure. A lot of people have not followed my advice, unfortunately, and I wish you had. You have adjustable rate mortgages out there that were not something we recommended. You probably invested through someone else because we never gave that advice. So again, we will have some guests on and experts in the loan modification world, so listen in on future shows for that.
Right now, let’s go to two subjects. No. 1, we’re going to provide another update on the mortgage market, which I think will be insightful to you, with a guest that we’ve had on several shows. And also, we are going to talk about credit repair.
Now, I do want to say that before we get into our credit repair session here that there are a lot of people out there in the world of credit repair, who are giving a lot of, frankly, bad advice. There are a lot of hokey firms out there that are just charging people big upfront fees and not delivering on the promises that they’re making. So be careful. Caution is the watchword. Let the buyer beware when looking into this credit repair stuff. It’s a complicated industry. It’s a specialized industry and there are a lot of things you need to know. I’d highly recommend that you go and look up resources on the subject, get books on the subject, and learn about it. If you are facing a situation where you need credit repair help, your credit report is a big asset to you, so make sure you treat it as such.
Let’s go to our first guest. We’ll talk about credit repair and then we’ll talk about the mortgage market. Thanks again for tuning in to Creating Wealth. Here we go.
I’m here with Isaac Hausman with AAA Credit Repair and wanted to talk about today a little bit of the credit issues, credit repair issues, and managing your credit. It’s a very important part. If you look at a balance sheet and you look at your net worth, most people would just put their assets and their liabilities, and they would rarely include as one of their assets their ability to borrow, and I think that, in today’s world, is an incredibly important asset. So Isaac, welcome to the show.
Isaac Hausman: Thank you so much, Jason.
Jason Hartman: Good. What does the public need to know about credit scores?
Isaac Hausman: Credit scores are the foundation of the decision making for creditors, whether it be mortgage lenders, Visa companies, department store credit cards, and this is throughout your financial life.
Jason Hartman: So basically, this amounts to a FICO score and what does FICO stand for?
Isaac Hausman: FICO score stands for Fair Isaac and they were founded in 1956, and their goal was to provide a numerical system, which will enable decision-makers to instantaneously decide whether they want to approve a person for a loan and at what rate.
Jason Hartman: When I first got into the real estate business back in the ’80s, I never really heard much about FICO scores back then. Everything later became sort of FICO driven. Why was that and was that a good or a bad thing?
Isaac Hausman: It’s, actually, I think, in the industry, there’s a little bit of a frustration with the fact that people feel it’s somewhat unfair. But be it that, the FICO score is the golden credit score that the mortgage companies go by that most people abide by. Fair Isaac feels that this is an objective way of cutting down the time it takes to make a credit decision and considering these decisions need to be made in a rather short amount of time, they feel that this is the best predictor of whether a person will pay back or not pay back their debts.
Jason Hartman: Okay, good. Now, there are three major credit bureaus. Let’s review those. Those are Experian, TransUnion and Equifax. Why are people’s credit scores different with each of these three bureaus, these credit bureaus?
Isaac Hausman: Good question. Each of the bureaus are independent of each other and it’s quite possible that certain creditors will report to certain bureaus and other bureaus they may not report to. Ideally, all the different repositories should have similar information and the FICO score for each bureau should be similar as well. But as we know in the real world, this isn’t the case. I’ve seen a range between 70 and 80 points and a simple explanation for that is a collection or judgment may show up on just one account rather than the other two.
Jason Hartman: Very interesting, yes. So that’s why the scores are different with each of the three bureaus. They’re just independent agencies and some vendors might report to one and not report to the other. Now, typically, they’re taking the middle score, right? The mid-FICO.
Isaac Hausman: Right. Currently, with a three-score report, the mortgage industry is taking the middle score.
Jason Hartman: Okay. Tell us more about credit scores, the kind of who, what, where, when, and how, and why, and all that kind of stuff. Is there anything else to mention there before we move on?
Isaac Hausman: Yeah. Let’s just talk a little bit about that. Credit score is an interpretation of what’s contained in your credit report. Now, the FICO score has been developed by mathematicians, statisticians. What they’ve done is they basically wanted to be able to predict the payment habit of a borrower, if in fact they were going to not pay their bills within a certain period of time. So what they’ve done is they basically have done a regression analysis, predictability, and they’ve come up with a number between 300 and 850, and the higher your score, the less risk you’re perceived as defaulting on a payment. And conversely, the lower your score, the higher the risk.
Jason Hartman: Good. Anything else about that before we move on to the next part?
Isaac Hausman: I would say that one of the main things to look at is credit scores are earned. They’re not given to you. You have to earn it. Just like your GPA average in school, credit scores are very similar. You really have to work for the high scores.
Jason Hartman: Good. Good point. Isaac, please provide us with some tips that will help listeners manage and increase their credit scores.
Isaac Hausman: This is the most important thing. The No. 1, 2, 3, most important item, is that pay your bills on time.
Jason Hartman: That would sound like an obvious answer, right?
Isaac Hausman: Well, as obvious as it is, it is the most important factor. Now, as well, you shouldn’t be going out there and just trying to open up new credit accounts and especially if you don’t need to. Sometimes, be careful with department stores that are offering you like special –
Jason Hartman: Discounts.
Isaac Hausman: — discounts, and also, you’ve got remember that your credit report is a report card. They’re going to look at things like how much you’re allowed to borrow, what are your limits, how much debt you have, what the utilization factor is. For example, if you have limits of $100,000.00 that you can use on all of your cards and you’ve borrowed in accumulation or in total $50,000.00, you’re at 50 percent debt utilization.
Jason Hartman: Is that considered high or low, 50 percent utilization?
Isaac Hausman: The ideal is 10 percent.
Jason Hartman: Oh, okay, so only 10 percent being utilized.
Isaac Hausman: Ten percent will give you probably the best score. As you go higher, it’s broken down in tiers, so as an example, you would probably lose points as your debt utilization went up and as soon as you get closer to the 80, 90 percent, the interpretation is you’re chasing your limits and you’re highly susceptible to be over your head.
Jason Hartman: Okay. Now, that’s kind of an interesting thing, Isaac because doesn’t that frustrate the credit card companies? They want you to use their cards, so it’s sort of an odd double standard in a way. They don’t want you to use too much of everybody else’s credit, but if they extend you credit, they want you to use it because that’s how they make money, right?
Isaac Hausman: Well, the concern the creditors have is if they pull your credit and the story that is conveyed is one where there’s increased risk, meaning that your debt utilization has gone up. You’ve opened up a lot of new credit cards. You’re starting to borrow from finance companies. This is a –
Jason Hartman: This is a red flag someone might be going down, right?
Isaac Hausman: This is a red flag. Exactly. And also, one of the other things that’s really important, that the public has a misconception about, is that they close old credit card accounts. That is the worst thing to do. Having old credit cards actually increases your score. One of the factors that determines your credit score is the aging of your credit.
Jason Hartman: So the older credit is actually the better credit because you’ve shown – you’ve had that, for example, if it’s a credit card, you’ve had that account for a long time. You’ve used it responsibly. That’s good for your FICO score.
Isaac Hausman: Exactly.
Jason Hartman: Okay, good. So close the new accounts. Don’t close the old ones, right? Is that what you’re saying?
Isaac Hausman: Well, if you’ve opened up new accounts, the damage has been done, so just to close a new account really doesn’t have a lot of benefit, unless it’s perhaps a finance company, which is not considered a very healthy credit to have. A finance company is looked at as a debt in desperation. So finance companies will hurt your credit score.
Jason Hartman: So credit cards are not as bad as having a finance company because they look at that as really an emergency move. Okay, good. Any other tips on improving credit scores. So don’t take the credit card when they say they’ll give you a 10 percent discount that day or a free T-shirt or whatever. I never do that by the way, but I think a lot of people fall victim to that just to get the discount. They’re buying $200.00 worth of clothing at the store, at the department store, and well, you get 10 percent off if you open a whatever charge card. And that’s a bad deal. Don’t do that because that really brings the score down, right?
Isaac Hausman: Right. Here’s another tip. If you’re shopping for a new car, the best thing is to try to shop for that car within a timeframe because all the inquiries for that auto within 14 days is all counted as one inquiry.
Jason Hartman: Ah, interesting point. So what you’re saying then, Isaac is get serious about a car and before you let anyone run your credit report, be real serious. Know what you want. Know where you’re looking. Pre-negotiate the deal would be my advice before. I don’t let them do my credit until the last minute when I’ve got the deal inked. If you’re going to have multiple credit inquiries, they need to be bunched together in a short timeframe.
Isaac Hausman: Right.
Jason Hartman: Okay, good. Good advice. Anything else?
Isaac Hausman: There’s probably a whole ton of stuff, but let me just give you a few that I’m asked most often. One is what do I do to develop my credit and credit score. An easy thing to do is get a debit card from your bank and in this way, the debit card, the bank will ask you to put up some collateral, which is fine. You may start off with having $500.00 in your bank account. They’ll give you your credit card and that is a way to start your credit history. Another fantastic way –
Jason Hartman: One thing on that if I may. That sounds good for a young person who’s maybe 18 years old who wants to start establishing credit, but for someone who is more established than that and may have more money in their account, I don’t personally use debit cards because it scares me that they have the entire access to my bank account. And I hear that getting the money back if there should be a theft or identity theft or whatever is much tougher than it is on a credit card.
One time, for example, my American Express Platinum card, someone had swiped the number or something somehow and I couldn’t believe it. They must have been a total idiot because they charged $12,000.00 all at the same store, right in the same timeframe. So I don’t know what ever happened with it, but I didn’t pay one penny to AMEX. And I’ve heard that if it’s a debit card, it’s a tougher deal. You might be protected, but the protection isn’t as good, blah, blah, blah, so I’m not personally in favor of them. But I do think for a young person with a very limited account balance, $500.00, like the example you used, probably a wise idea. Any thoughts on that?
Isaac Hausman: Yeah, well, the liability I really don’t know about. I do know, like you said, Jason, with credit cards, you have a protection. Unauthorized use of a debit card, I’ve never really investigated that situation. It’s never come across my desk. But here’s another one in case you are concerned about a debit card. Become an authorized user on someone else’s account that has a long history of paying on time.
Jason Hartman: So that again is sort of advice for the young person, you know Mom and Dad’s account.
Isaac Hausman: Well, it could be for anybody that needs another credit trade line that will boost their scores. It also provides aging on your credit history. So it has more than one practical contribution to your credit score.
Jason Hartman: Okay, good. What else?
Isaac Hausman: I think the best thing I could say is if I can see an individual’s credit report, I could best give advice for their particular situation because everybody’s credit has a different story and each person will fit into a different category within the credit scoring system.
Jason Hartman: Good. Good advice. Okay, Isaac, so if one were to sort of break down a credit score and analyze it and really drill down into it, what components make the score a good score versus a bad score. I mean you alluded to that in some of your previous statements. Anything else you want to add, though?
Isaac Hausman: Yeah, let me talk about the components of the credit score. Thirty-five percent of the score is based on payment history, so obviously, if you’re late 30 days, 60 days, 90 days, these will all bear on your 35 percent of the score. Thirty percent of the score is based on the amount owed. This gets into the debt utilization. What are you credit limits and how much have you used in relation to that credit limit? The lower the debt utilization, the more positive incremental numbers you’ll get on your score.
Fifteen percent is based on the aging or length of your credit. Someone who has an average history of 20 years or 15 years is going to score better than a person who only has a five-year history on their credit.
Ten percent is based on what you’ve recently applied for, your recent inquiries, your recent new accounts. Ten percent is your credit mix and that brings up a good point. The optimum credit mix is a mortgage, an installment account, and three to five revolving accounts.
Jason Hartman: So an installment account versus a revolving account. Can you distinguish those?
Isaac Hausman: Yeah, an installment account is where you have a fixed payment every month. Typical is an amortized mortgage, is a 36-month payment loan that amortizes to zero at the end of the term. A credit card is a revolving, whereby you pay a certain percentage every month and if you’re ever so lucky to pay it off, you can consider yourself fortunate. And so the ten percent credit mix basically says to the – the interpretation of that is that you have maturely developed your credit so that you basically are handling the most important item, which is a home, a mortgage. You’re able to handle a car and you also have the ability to handle revolving credit cards.
Jason Hartman: So it’s kind of like we tell our clients, diversify into multiple real estate markets when they’re investing. So really have a diverse base of credit, in a way, is a good idea, huh?
Isaac Hausman: Right. Another important factor, now that you mention it on tips that people need to know, is that if you have a credit card that’s seasoned, you’ve had it for a long time, the important thing is to use it once in a while, but at least use it once every six months because if you don’t use it, it becomes inactive on the credit reports and you’ll lose the positive contribution it has to your credit score. So for in fact, if you have, let’s say, an old Visa card, go out and buy yourself a tank of gas or go out for a dinner and pay them on time. That will contribute to your history, to your payment, and that is a very important fact.
Jason Hartman: Okay, so the point there is no dormant cards. Every couple of months, every six months, at least, use your card a little bit. Don’t have the one card that you use all the time and the six other cards that you never use. Rotate them. Diversify again. Same kind of advice. It’s interesting. Having credit makes a positive contribution to your credit report it sounds like.
Isaac Hausman: Yeah, you earn your scores. Here’s a good one for you. Let’s say you’re on vacation or you forget to pay your mortgage on time, and we’re talking about not where it’s 15 days late or 20 days late. We’re talking about where it’s more than 30 days late. On the credit report, a mortgage that is paid less than 30 days late may be considered late in terms of the lender, whereby you have to pay their late fee, but it isn’t late by the credit bureaus until it’s 30 days past the due date. So if your payment is due August 1, it won’t be considered late on the credit report until September 1 the following month.
Now, if that happens to you, don’t get too disgusted. I know it’s very frustrating. The first thing you need to do, especially if you have a long history with that mortgage holder, is give them a call. Ask for a courtesy deletion. Tell them that you’ve been with them for so many years. You always pay on time. You thought you had made the payment. And in most cases, they’ll do the benefit of the doubt and delete it. And this is also true with your credit cards. If it’s an isolated situation, they’re more apt to help you. But please don’t call them every month stating that oh, I had the same reason. I would say this is a cure if it happens once in a blue moon.
Jason Hartman: So, Isaac, if someone ran into some hard times and we’re obviously in pretty crazy economic times right now, and someone has a collection that’s showing up on their credit report, how do they deal with it? What is the best way to handle settlement, payment, etc?
Isaac Hausman: Very good question, Jason. There are several actual factors to look at in a collection account. Every state has a statute of limitation and one of the biggest threats is that a collection account can turn into a judgment. So adhering to the statute of limitations may tell you that in fact a collection account, if it’s past the statute, they don’t have a right to file judgment. This is important in some of the other things we’ll talk about later in credit restoration, but the ultimate goal when you do have delinquent credit is to make sure that you delete the account. By merely settling an account with a creditor that’s in collection payment, fifty cents on the dollar, it will not help your credit scores. Settling an account is not considered a positive thing.
So the ultimate goal with a collection is to negotiate with the collection individual, whether it’s the supervisor, try to talk to the right people that will deal with you, and request a deletion letter. That is the best way to handle it. A deletion letter will get rid of the account and you will have no adverse affect on the collection.
Jason Hartman: So the deletion letter is the key. Delete it from my credit report. So negotiate that as part of the settlement.
Isaac Hausman: Exactly.
Jason Hartman: Okay, good. Good advice. Tell us about the different types of credit. You know there’s a lot of – frankly, there’s a lot of sleazy credit repair type companies out there and there have been a lot of scams in this world. I know I’ve read things about various consumer protection efforts and so forth and whether this is all kind of legal or not, or gray area, or what. Tell us about the different types of services, if you would, Isaac, and what makes yours different.
Isaac Hausman: There are several ways to approach credit repair, credit restoration. One way to handle it is where the individual himself attempts to contact the credit bureaus and challenge items on your credit. Unfortunately, that is the most beneficial for the credit bureaus, but the least beneficial for the individual. The credit bureaus, typically, on an online challenge will outsource the verification to another country and as long as the response is verified, the consumer’s left high and dry and nothing will be done. That is one method.
The other method, whereby you have someone who’s trained in credit repair, and they represent you in the letters that they send to the credit bureaus. Where that helps is because they are trained, they have a much better success probability to remove things because they’ve been trained in the types of letters to send in. That is No. 2.
The most effective, by far, is the attorney-assisted credit repair. In an attorney-assisted credit repair, the letters are sent and signed by an attorney. Now, we all know that when attorneys get involved, the stakes are raised.
Jason Hartman: It gets expensive.
Isaac Hausman: It gets expensive. And the credit bureaus, when they receive letters from attorneys, instead of outsourcing their verification, they handle it in house. This is what you ultimately want. You want the credit bureaus to verify and validate that what is alleged on your credit report is actually accurate and confirmed.
Jason Hartman: So what should someone watch out for as a consumer who needs assistance in the credit restoration or repair world?
Isaac Hausman: One of the things that must happen is that the credit repair companies are completely legal, but one of the things that you have to be careful about is if you’re paying a credit repair company upfront and the work has not been done, that is totally illegal. Money should only be sent in when the work has been done.
Jason Hartman: Well, Isaac, this has been some valuable information and I think our listeners have learned something here. I know I did. Thanks for being on the show today.
Isaac Hausman: I appreciate it very much and hopefully you all keep on striving to earn your great credit because that will make your life a lot easier and a lot more fruitful economically.
Jason Hartman: It’s a big asset. Thanks, Isaac.
I’m here with Randy Luebke of Nations Home Funding. He’s been on the show before and Randy, welcome back.
Randy Luebke: Thank you, Jason. Good to be here today.
Jason Hartman: Good. I want to talk to you about the perilous, very scary economic news that is going on. Boy, are we in a different world or what? It is really amazing what’s going on. Talk to us, Randy, about the credit markets and about the deleveraging that is occurring in the financial markets.
Randy Luebke: Yeah, Jason. I think there is just a lot of anxiety out there. You turn on the newsreels at night; you see lines of people standing in front of IndyMac.
Jason Hartman: Haven’t seen that for a while.
Randy Luebke: Yeah. I mean it’s like watching that movie, “It’s a Wonderful Life” and the bank run, right?
Jason Hartman: Yeah. But Jimmy Stewart was a lot more honest than most of these crooks on Wall Street.
Randy Luebke: Well, he did it in cash. The point is, you know, it’s like newsreel after newsreel, house markets are declining, jobs are being lost, people are standing in line wondering if they’re going to get the money. And what I thought I’d like to do today is just spend a few minutes with you really debunking this whole idea of what this credit crisis/crunch is all about, making it simple so people can understand it and realize that this is really an opportunity in front of them and they want to take advantage of it.
Jason Hartman: Yeah, it really is. Just a couple things I’d like to say at the outset. No. 1 and we’ve said this before on the show, but it shows the complete ignorance of what goes on in the media and these so-called experts that get up and talk about the housing market, as if there is such a thing in a country as large and diverse as the United States of America. There are many, many housing markets.
And No. 2 is these kinds of crazy economic times are when fortunes are made and it is really amazing. When people can really exploit these little cracks in the marketplace and the little nuances that are going on and hopefully that’s what we’re doing here at Platinum Properties Investor Network is teaching people how to do this. And we’ll do that a little bit in this presentation talk with you today, but good opportunities out there. As Warren Buffet says, be fearful when everyone else is greedy; be greedy when everyone else is fearful. So now’s the time to be greedy, huh?
Randy Luebke: I think it’s a great opportunity.
Jason Hartman: All right, well, from your chair, Randy, what do you see?
Randy Luebke: Well, first of all, let’s talk about some definitions. I think a lot of times we get hung up or caught up in the sound bites that we hear on the news as well. So we hear this thing, credit markets are deleveraging. That’s kind of how you started this thing, right? So let’s just explain first of all that credit actually means debt. We’re talking about the ability to lend money, so from the bank’s point of view, they’re a creditor, and they’re lending money, so that’s what debt is. And deleveraging simply means paying it off. So basically, what’s happening is all of the institutions that have been lending money so loosely over the last 15 – 20 years are now starting to pay off the debt.
And the real question is why? Why are they going around doing that? So the best way to understand why is for everybody here to really understand leverage. Now, I think in your teachings, in your podcasts and, certainly, in your live events, you do a great job of explaining the benefits of leverage, so what I’d like to do is just take a minute and explain how leverage works. Is that okay?
Jason Hartman: Sure.
Randy Luebke: Okay, excellent. All right, so let’s just say I have $100,000.00 to lend you, Jason, and I can lend it to you at a 6 percent rate of return. At 6 percent, I get a $6,000.00 profit. Real simple, right?
Jason Hartman: Six percent interest.
Randy Luebke: Six percent interest.
Jason Hartman: So $6,000.00 per year would be your gross return on investment.
Randy Luebke: Exactly. So if I took $6,000.00, divided by the $100,000.00 I invested, I would have a six percent return on investment, ROI. That’s exactly what they’re talking about. So we do this and you like it and you tell a friend, and they want to borrow some money, too. So now, I have my first problem. I have more borrowers and I need more money. So the solution is I’m going to go borrow some money myself from other people, right? Well, if I’m a bank, where do I go borrowing that money or how do I go borrowing it?
Jason Hartman: The good ole Federal Reserve System and they have a thing that makes it very convenient for you to borrow called fractional reserve banking, which allows you to borrow much more than you have in assets and you can create inflation doing that. But kind of another subject we’ve discussed on other podcasts. Go ahead.
Randy Luebke: Well, so, if I’m a bank, I’m going to borrow money from my customers in the form of checking accounts, savings accounts, and CDs because if you think about it from the bank’s perspective –
Jason Hartman: A deposit is a loan to the bank.
Randy Luebke: Exactly. So now I have a liability to you, but I also have more money and that’s what I need. So let’s say in our example that I need $100,000.00 and I get somebody to buy a CD from me and I’ll pay them a 4 percent rate of return, which is reasonable today. So my cost for that $100,000.00 over the course of a year, of course, would be $4,000.00, $100,000.00 at 4 percent. So now let’s do the math. I have $6,000.00 I’m going to earn when I lend the $100,000.00 out. Subtract from that the $4,000.00 cost. I make a $2,000.00 net profit.
Jason Hartman: Sounds pretty good. You’re playing the margins and one thing I want to just inject here, Randy, so you as the bank are playing the margins, so you have earned a good rate of return. You’ve profited by $2,000.00 or in essence, 2 percent ROI, right?
Randy Luebke: Well, 2 percent ROI, except for the fact that I leveraged that rate of return. So before, when I gave you my $100,000.00, I made $6,000.00, my ROI was 6 percent. But now, I only had to invest $4,000.00 of my money and I made a $2,000.00 profit. So $2,000.00 profit divided by my $4,000.00 investment, now what’s my ROI?
Jason Hartman: Fifty percent.
Randy Luebke: Yeah, so I love leverage.
Jason Hartman: Yeah, that’s really good. And here’s the question that we did answer on a prior podcast, but I just want to make sure we mention this to our listeners again because this is really important. Many, many listeners to the podcast say to me, well, we talk a lot about inflation, as you know. If the true rate of inflation is 8 percent, 10 percent, 12 percent, whatever it is and it’s different for everybody because everybody spends differently, so why would a bank loan you money at 6 percent when it’s below the rate of inflation? And the answer is what you just said, Randy, because the bank, as long as they can attract depositors at 4 percent, they don’t care what the rate of inflation is. They’ve got a margin.
It’s kind of like saying, well, couldn’t you sell this widget for $10.00? Well, maybe you could, but who cares? If you’re buying it for $5.00 and you can afford to sell it for $7.00 and sell more of them at $7.00, there’s still a profitable business there because all you’re doing is playing the margins, the margin between where you borrowed in the form of deposits to the bank and the margin of what you loaned out in the form of income to the bank.
Randy Luebke: That’s right. And leverage amplifies everything. So here we took our 6 percent rate of return, amplified it through leverage to 50 percent.
Jason Hartman: Good stuff.
Randy Luebke: Thank you. Now the story gets better. I got $100,000.00, remember? So I can take that $100,000.00 and I know that I can, with each CD, pay out $4,000.00 in expense, so therefore, I can create 25 of these $100,000.00 CDs.
Jason Hartman: That’s fantastic. It’s kind of like fractional reserve banking.
Randy Luebke: That’s exactly correct. So now, let’s do the math. I have $2,000.00 profit from every one of these deals I do and now I can do 25 of those deals with the same $100,000.00 I was only able to loan out once. So now, instead of making $2,000.00 for my money or $6,000.00 for my money, I’m able to earn $50,000.00 net profit from that same $100,000.00.
Jason Hartman: You know what, Randy? This makes banks look so darn profitable. It makes you wonder why a bank could ever fail.
Randy Luebke: Well, we’re going to talk about that.
Jason Hartman: All right and by the way, this podcast is in light of, largely, the IndyMac Bank failure, second largest bank failure in U.S. history.
Randy Luebke: Absolutely and we’ll tie that in at the very end here. So here’s what happened. We started out with $100,000.00. We found a bunch of people that wanted to borrow the money, so we found 25 more people to give us $100,000.00. We loaned out all that money to all those people and we’re making lots of money. We’re real happy with that.
But now, I’ve got a new problem to deal with. That’s this. So I borrowed the money from my customers in the form of a CD for a term of one year, a one-year CD, but I loaned the money out to my other customers for 30 years on a 30-year loan. So I have a problem there because what if I need to pay one of my depositors back before 30 years is up?
Well, Fannie Mae and Freddie Mac to the rescue. This is where they come in because what Fannie Mae and Freddie Mac will do, which they’re called GFCs, by the way, which stands for Government Sponsored Enterprises. They’re privately owned businesses that are backed and insured by the federal government.
Jason Hartman: So they’re these pseudo, quasi-governmental entities in a way and they’re, as we know now, potentially too big to fail, so the government bails them out.
Randy Luebke: That’s how it works. So what Fannie and Freddie say to me is this: Listen. If you’re willing to “conform” – and I put that in quotes – if you’re willing to “conform” to my rules in the way you lend out at that money, I will buy all of your loans for you and still let you keep a small profit. So let me say that again. As long as you’re willing to make loans in the size I say, into the standards I ask you to make them in, I’ll guarantee to purchase every one of those loans from you and let you keep a small amount of the profit.
So now what happens is that $100,000.00 I had that I could loan out once in the first time we went through this, 25 times when we found people to buy CDs from me, now I literally have an unlimited amount of loans I can make because I can recycle that $100,000.00 over and over and over again. That’s what we call credit expansion or leveraging.
Jason Hartman: And what does that do? It creates inflation.
Randy Luebke: Well, it certainly does and also can bring a new problem into play, which is what we’ve been experiencing as of late. Now, we talked about this earlier. First of all, we know that leverage amplifies everything, which means we took our 6 percent rate of return up to 50 percent, but it also can amplify your losses. In fact, I like to always say that a little bit of leverage can do a lot of good. Too much leverage or leverage used in a way that’s not proper or appropriate can cause a lot of problems and this is what we’re experiencing.
What if one of my borrowers stops paying on their mortgage? That’s called a default. One of the rules that Fannie and Freddie says is that if one of your loans, if one of your borrowers stops paying on your loans, you need to buy that loan back from me. You need to give me my $100,000.00 back. I say okay Fannie and Freddie; I have no problem. I have a whole bunch of loans on my books. I will sell one of those loans to somebody else that wants to buy it and I’ll take that cash and pay you back.
Well, that works great until another loan goes into default and another loan goes into default, and the next thing you know, I continue to sell off loans, trying to pay off the bad debt. Now, that whole process of selling down these loans and paying off the debt, that’s called deleveraging, and that’s exactly what we’re doing today.
Jason Hartman: Yeah, and the issue here is when they sell those bad loans to some agency other than Fannie and Freddie, they’re selling them at a substantial discount, right?
Randy Luebke: They’d be selling them potentially at a discount if they weren’t selling them to Fannie and Freddie in a good market, but certainly, in a market where home values are declining and people are already in default on their loans, you bet. They’re selling them at a big discount.
Jason Hartman: Yeah, here’s another thing I want to mention about that and I don’t have any specific statistics. It’s more of an impression anecdotally and I’ve been saying this for a long time, that the sort of high-risk loans for the lenders, and when I say that I mean adjustable rate loans that have significant backend increases in their payments and their interest rates, those are largely in the high land value, what I call yuppie markets, California; to a lesser extent, Arizona, Nevada. To a high extent, California, New York, a lot of Northeast Boston, probably Hawaii, the areas that have high real estate values, sort of yuppie populations, high white-collar, people that like the good life, if you will.
You see more of that sort of instant gratification, live for today type of attitude, where people have this sort of optimism and think that it will go on forever, and of course, these high land value markets are the very risky markets. Go back and see my podcast on the Risk Evaluation Methodology for more on this. But you have more of an occurrence of this, so these are the markets that are really declining in value and the hardest hit in terms of depreciation.
So would you agree with that that these loans are largely concentrated in – when you look at this map that you brought me today, these are concentrated more so in the areas of this type of market, high land value, yuppie population, etc.
Randy Luebke: I do agree with you, Jason. Again, the question is why. You always want to ask why. And we’re talking about this conforming to my Fannie/Freddie guidelines. Well, if you look at the home values across the population of the United States, the bulk of the United States will have loans that will fit inside the conforming loan limits. Once you got outside of these conforming loan limits into the “jumbo loans,” now all of a sudden, we had all of these loans that were being created on Wall Street and they fit the market with these high home prices. So one kind of contracted the other.
Jason Hartman: Yeah, exactly. It’s a domino effect, no question.
Randy Luebke: Absolutely. So let’s go back to the story here. So what’s happening is I’m having some defaults on my loans and, at first, I’m okay with this because I’m able to sell these loans to other people, get the cash. I’m going through the leveraging process. This is what we call a credit contraction. So we go back to the beginning of the story. I lend out more and more money. That’s credit expansion. Now we’re going through paying off all those loans. We’re going through credit contraction.
Now, in a normal business cycle, that’s fine. That’ll happen all the time and we would expect loans to be bought and sold and paid off and new loans made. The problem is at one point, somebody may stop buying my loans altogether and that’s exactly what happened, and it came to a head, really, in August of 2007.
Jason Hartman: Yeah, I remember. Last August is when we really saw the big first signs of this when they stopped buying these loans and that was the beginning of the really, really heavy part of the meltdown, right?
Randy Luebke: That’s right. That’s when a credit contraction became a credit crunch.
Jason Hartman: Okay. Good definition, contraction versus crunch.
Randy Luebke: Versus crunch. Now we’re –
Jason Hartman: So contraction, would you say, is a normal part of the business cycle, versus a credit crunch is a disastrous part of the cycle.
Randy Luebke: Absolutely. Another analogy is that the credit markets were frozen like ice and that causes that crunch. The whole market depends on this ability to create fluid money cycles. If the money can be loaned, resold, re-loaned, resold, re-loaned, everything works. But the second that cycle breaks, you’ve got a crunch.
Jason Hartman: Right.
Randy Luebke: And that’s what we’re experiencing right now. So what ultimately happens is now my little bank that was doing so well and making all that money and I thought I was so smart because I leveraged, leveraged, leveraged, all of a sudden, my liabilities are greater than my assets. In other words, I owe more than I own. And then that little fellow that we see on TV all the time now, that little bald guy steps in from the Federal Reserve, our friend Mr. Ben Bernanke, right, and he says you know what? You’re insolvent, Mr. Bank, so we are going to shut you down. We’re going to take you over. And that’s exactly why the lines were forming outside of IndyMac Bank, second largest bank failure in the history of America.
So this is the idea, that leverage certainly makes sense, but the proper use of leverage as we talk about and you talk about in your live trainings as well as your podcasts, is the proper use of leverage that really makes sense.
Jason Hartman: Absolutely and you know, Randy, this is another thing I want to kind of mention that ties in with this concept. I would much rather be the landlord than the lender, and the reason is because I find that like when I’ve invested in notes and trust deeds, I am always having a tough time getting paid back. But when I rent my properties, I get paid. I’ve only had one eviction in 21 years, where I’ve had to evict a tenant, and that’s a pretty darn good record considering as many tenants as I’ve had over the years. And the key is when you look at these bank failures, they did not sustainable assets backing their leverage.
And so what we say is use leverage prudently and properly, but we do like leverage a lot. Leverage is a very powerful tool for good, but if you don’t have it attached to something sustainable, in other words, a rental property that makes sense the day you buy it, you’re going to get yourself into trouble and on a personal level rather than a bank level here, this is what has happened to people in California, Arizona, Nevada, Florida. They bought these properties with a ton of leverage and the properties never made sense in the first place. I mean, folks, what is there to say that you don’t get here? It’s so simple.
It’s like everybody’s sitting around wondering, well, why is this happening to me? My life is ruined. Well, you bought something that never worked the day you bought it. It wasn’t a sustainable investment. So it’s got to be sustainable and if you want more information on this, go back and listen to the other podcasts where we’ve talked about evaluating risk, evaluating properties, evaluating cash flow. We’ve got a whole body of work here in 60 prior shows that you can listen to on this, all right?
But Randy, what else on this?
Randy Luebke: Well, let’s just kind of wrap this up here because I think the listeners are probably asking, okay, this is good. I understand how the system works. I understand what happened now. So what can I do? What should we do in light of what’s going on? And my lesson here is really this: that adversity equals opportunity and right now, we’re definitely in an adverse situation. Would you agree with that?
Jason Hartman: Absolutely and that’s where the opportunity comes in. The Chinese have the symbol for crisis and it’s the same as the one for opportunity, and they say crisis is an opportunity riding the dangerous wind. That’s the literal translation for that symbol. And this is when opportunities are created, but not everybody will qualify for the opportunities right now, right?
Randy Luebke: Well, that’s absolutely true. In fact, I think it was Baron von Rothschild that stood in the streets of Paris during the French Revolution, right, who said buy when there’s blood in the streets. There’s blood in the streets right now.
Jason Hartman: Yeah, there really is. Yeah.
Randy Luebke: So I have an action acronym. I love acronyms and it’s CBS, okay? That should be an easy one for everybody to remember. C, get your credit in tiptop shape today. B, start buying investment-grade real estate, real estate that makes sense now and Stop waiting because, really, now is the time to act while others won’t.
Jason Hartman: CBS, good acronym. Credit, buying and stop waiting. So get your credit in tiptop shape, work on your credit. It’s a major asset. Start buying sensible properties that make sense the day you buy them and don’t wait because the opportunities right now are really, really phenomenal, as long as you do it right and you do it in the right locations. Randy, thanks so much for being on the show again. We’ll have you back soon.
And if you want to reach Randy Luebke, you can visit www.jasonhartman.com and on the website in the financing section, there’s a profile and some information about Randy there, as well as a web form where you can contact him. Randy, can people also reach you by email?
Randy Luebke: Absolutely. The email address is very simple. It’s email@example.com, randy@rebiz, like real estate business, but spelled rebiz; firstname.lastname@example.org.
Jason Hartman: Excellent. Thanks for being on the show.
Randy Luebke: Thanks.
Jason Hartman: Good morning and welcome to the Speed of Money. This is your host, Jason Hartman, and today, I want to discuss the ultimate inflation shield. Forget all the drama of the Olympics. It’s inflation that has truly won the gold medal in 2008. Did you see the report out of Washington yesterday? The Labor Department reported that wholesale prices were up 1.2 percent in July alone. Just for a little historical perspective, that’s the fastest pace in 27 years. Don’t be deceived by the temporary micro trends. Inflation is here, folks, and it’s time you start profiting from it.
Here’s a real life example of how inflation has benefited millions of people. In 1972, a dollar was worth a dollar. We understand that a dollar declines in value through inflation. Remember inflation, or the devaluation of the dollar, attacks our assets, such as our home equity, our stocks, our bonds, our mutual funds. But fortunately, it also diminishes the value of our debt. That is a wonderful thing.
In 1972, if someone bought the median price home and a dollar was worth a dollar, by 2001, that dollar had been destroyed in value and it was only worth $.24. This means a person who got a fixed-rate mortgage actually got paid to borrow money over the course of those 30 years.
We are in a historic time right now, an era of negative interest rates, where you can get paid to borrow money. Yes, you heard me right. If you would like to see this exact example in this chart, visit www.jasonhartman.com.
Next week, we’ll discuss the best type of inflation shielding assets, which create the most profitable debt benefit. Visit www.jasonhartman.com and join me next week, right here, on KABC 790 on The Speed of Money.
Announcer 2: Are you ready to take the next step? Then join us at Platinum Properties Investor Network in Costa Mesa, California, for our next Creating Wealth Seminar on Saturday, September 20. As millions have discovered, you can become very wealthy by investing in prudent income properties. Jason Hartman and the rest of the Platinum Properties team will show you how to select the very best markets, earn returns in excess of 30 percent and protect yourself from a loss of equity.
In this full-day educational event, you will learn all about Jason’s unique, conservative investment philosophy that works in real life with no hype. Seats are limited, so visit www.jasonhartman.com today to register. That’s www.jasonhartman.com.
Jason Hartman: Attention agents, brokers and mortgage people. Do you know that we cooperate? Do you know that our network is an open system, that you can refer clients and outsource your investor clients to us and receive passive income? It’s a really great opportunity. All you have to do is register your clients at www.jasonhartman.com and tell them to attend one of our live events, our live educational seminars.
Listen to our podcast, go to the website, and request our free CD at www.jasonhartman.com. And if they invest with us per the terms listed on the website, you will get a referral fee. We have lots of agents, brokers, and mortgage people that receive surprise referral fees that they weren’t even expecting. They get a check in the mail and they are just happily, happily surprised. It’s a nice extra supplement to your income. So be sure to take advantage of our broker cooperation. Agents are welcome. We cooperate with outside people and we’d love to help you with your investor clients.
Announcer 2: On October 25 and 26, join us at the Master’s Weekend, A Gathering of Experts. This special event only happens twice a year. With our panel of 16 experts, we’re putting enough real estate brainpower in one room to make Donald Trump flinch. The Master’s Weekend is a powerhouse education that can revolutionize how you think about money and wealth. Our speakers come armed with the latest and shrewd real estate investing techniques and will address such issues as the smart way to choose your properties, how to grab every tax benefit the law allows, how to put together the most creative financing package possible, the hidden power of the 1031 Exchange, and how to easily invest in dynamic growth markets outside of California.
Order your ticket before October 1 and you’ll receive our early bird discount. Space is limited. Reserve your seat now. Head to www.jasonhartman.com and click on Events. That’s www.jasonhartman.com. The Master’s Weekend beginning October 25.
Jason Hartman: Hey, I just wanted to announce a couple of quick things for you. If you are able to come to one of our live events, we would love to see you and meet you in person. We’ve had people fly in from all over the U.S. for them. So hopefully you can join us for some of those events.
I wanted to mention to you that we have a new offering, a free CD, a free audio CD, that you will really, really like. We’ve had so many people that have given us really good comments about them, and you can go to our website at www.jasonhartman.com and just fill out a little quick web form and you can either download it or you can have the physical CD mailed to you in the postal mail. But get the free CD, especially if you are a new listener. You need this. And if you are a regular listener and you’ve listened to all the other old shows, you don’t need the CD so much, but it will be a nice review for you either way. But if you’re a new listener, you definitely want to go to www.jasonhartman.com and request the free CD.
Announcer 2: Have you heard about the GoZone, what might be the greatest tax benefit in history? If not, you must attend our GoZone Tax Benefit seminar on Tuesday, September 16, right here in Costa Mesa, California. Act now to start slashing taxes from the past two years and set up your ironclad tax annihilation plan for next year.
Sure, you could spend months picking through tedious legal jargon yourself, but our real estate specialists already understand it and for less than the price of a good steak with all the trimmings, you could be front row center at the GoZone seminar. Ask questions. Take notes. Bring your tax advisor. Leave with a solid understanding of how to save on taxes like no other time in history.
To register for this very special event on September 16, head to www.jasonhartman.com and click on Events, www.jasonhartman.com.
Jason Hartman: Remember that Platinum Properties Investor Network has moved. We are in our beautiful new office in Costa Mesa, California, 555 Anton, Suite 150, in Costa Mesa, California, 92626, and we’re right by world-famous South Coast Plazas. So come in for a visit and a little shopping.
Also, we just uploaded another video podcast and I’d highly recommend that you subscribe to that. There’s some stuff that just lends itself better to video than audio. If you want to see what’s on that, subscribe to it, you can go to www.jasonhartman.com. If you use iTunes or an iPod and you’re an Apple person, then you can go to the iTunes Store, type in Jason Hartman, and two podcasts will come up, the video podcast and the audio podcast. And you’re probably already, if you’re listening, a subscriber to the audio podcast, so make sure you get yourself a free subscription to the video podcast as well.
And this particular one that we just loaded in the video podcast is about Naked Short Sales and what goes on with this short sale and manipulation of the stock market. It’s a very interesting report from Bloomberg News and I think you’ll really learn a lot from that. So be sure to tune in and watch that.
Be sure to see appropriate disclaimers and disclosures on our website at www.jasonhartman.com. Remember that we are not tax or legal advisors.
Anyway, we’ll talk to you next week. Thanks for listening.
This material is the copyrighted creative work of either Jason Hartman, the Hartman Media Company, Platinum Properties Investor Network, Incorporated or the J. Hartman Company, all rights reserved.
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Duration: 55 minutes